Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Acumentis Group Limited (ASX: ACU) uses debt. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest analysis for Acumentis Group
What is the debt of the Acumentis group?
As you can see below, Acumentis Group was in debt of A $ 3.25 million in December 2020, up from A $ 5.18 million the year before. However, he has A $ 3.19 million in cash offsetting this, leading to net debt of around A $ 57.0,000.
A look at the liabilities of the Acumentis Group
According to the latest published balance sheet, Acumentis Group had liabilities of A $ 10.2 million due within 12 months and liabilities of A $ 5.23 million due beyond 12 months. In return, he had A $ 3.19 million in cash and A $ 4.06 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by A $ 8.21 million.
Acumentis Group has a market capitalization of AU $ 17.9 million, so it could most likely raise cash to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. But in any case, Acumentis Group has virtually no net debt, so it’s fair to say that it doesn’t have a lot of debt!
We also note that Acumentis Group improved its EBIT from a loss last year to a positive AU $ 768,000. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the results of Acumentis Group that will influence the balance sheet in the future. So, if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) translate into actual free cash flow. Fortunately for all shareholders, Acumentis Group actually generated more free cash flow than EBIT over the past year. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
The conversion of Acumentis Group’s EBIT into free cash flow was a real advantage in this analysis, as was its net debt to EBITDA. On the other hand, our confidence was undermined by his apparent struggle to cover his interest charges with his EBIT. When we consider all the elements mentioned above, it seems to us that Acumentis Group is managing its debt quite well. But beware: we believe debt levels are high enough to warrant continued monitoring. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 2 warning signs with Acumentis Group and understanding them should be part of your investment process.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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